Nike’s 540 Patents in 2013: What Does it Mean?

Nike Inc.’s stock wasn’t the only thing that hit a record high for the sneaker giant in 2013: so was the number of patents it was granted for innovations like power-lacing shoes reminiscent of Marty McFly’s from “Back to the Future II.” And these patents hold tremendous value for investors.

Nike was granted more than 540 patents by the U.S. Patent and Trademark Office in 2013, up about 60% from 340 in 2012, according to a week-long study of thousands of Nike’s patent filings since the year 2000 by Macquarie analyst Laurent Vasilescu, who upgraded the stock to outperform from neutral last week.

The total number of patents granted to Nike has risen an average of 14% every year since the turn of the century, compared to an annual rate of 4% for the total number of utility patents granted by the patent office during the same period, the analyst’s research showed.

Through April 15 this year, Nike already has 135 patents granted, compared to about 120 patents granted during the same time last year. The company has filed an average of more than 300 patents each year since 2007, according to Vasilescu’s research.

In total, a MarketWatch study, based on the “assignee name” search query in the patent office’s database since 1976, Nike was granted more than 4,000 patents, compared to 51 each for Under Armour and New Balance; 275 for Adidas and 482 for Reebok, which is owned by Adidas.

“It’s a window into the future of what Nike might do,” Vasilescu said in an interview. “This is just another way of Nike differentiating itself. This is important.”

For investors, Macquarie’s research showed that for companies with large patent portfolios, their return on equity, or profit over equity value, “improve substantially going forward” despite short-term research spending impact. The firm’s analysis showed these companies also tend to outperform on a stock return basis.

Nike, for instance, saw its return on equity rise into the teens during the early 2000s to the most recent five-year average of 21%, compared to an average of 16% for Under Armour and 12% for Adidas, he told MarketWatch — adding that most of Nike’s rivals have a return on equity in the low-teens rate.

“This could bode well for Nike as the company begins to benefit from further product differentiation going forward,” he said. He estimated Nike’s R&D spending at about a mid-to-high single digit percentage of its more than $25 billion in sales.

“We continue to invest in product innovation,” Nike spokesman Del Hudson said in an email, declining to give specifics. He added that Nike has built a “Materials Science Innovation Group” which is part of the “Nike Explore Team” at a 16,000-square-foot Nike Sport Research Lab, where athletes, scientists, engineers and designers gather to focus on “biomechanics, physiology, perception and athletic performance.”

What does it mean for consumers? Vasilescu’s study found that many of Nike’s patents correlate with its product introductions. He found several Nike Free-related patents awarded in 2006, when he said the shoe that mimics barefoot running was introduced.

The Nike Free franchise has since expanded beyond running footwear and now totals $1 billion in sales, the analyst told MarketWatch. Patents granted in 2013 include automatic-lacing shoes and goggles to track golf movement. Nike’s long-time designer Tinker Hatfield, who has worked on Nike’s Air Jordan shoe series, reportedly said in February that the Marty McFly shoes will become a reality in 2015.

The 2014 patents Nike was granted so far have been for innovations like shoes that change color and devices that heat golf balls, MarketWatch found. As Nike has diversified its business beyond footwear to golf products and fitness tracking devices like the FuelBand, its patents granted also showcased the change. In 2006, the peak year when Nike was granted patents prior to the recession, about 75% of its patents were footwear related as Nike prepared to introduce its Free, Lunar and eventually Flyknit sneakers, the analyst said.

Last year, the number of footwear-related patents granted, while still around 300, shrunk to about half of the company’s patent portfolio as Nike expands into golf and wearable fitness tracking gadgets, Vasilescu said.

“This may be an indication of how Nike’s product portfolio may evolve over the next few years.”